Order Description
Please read the case information and answer the questions that follow the case in the body of the research paper in APA format.
The case is from STRATEGIC MANAGEMENT, SECOND EDITION by Frank T. Rothaermel, ISBN#: 978-0-07-764506-9.
CHAPTERCASE 3 Tesla Motors and the U.S. Automotive Industry
THE BIG THREEGM, Ford, and Chrysler dominated the U.S. car market throughout most of the 20th century. Having enjoyed protection behind high entry
barriers, GM once held more than a 50 percent U.S. market share and was highly profitable for many decades, until about 1980. Ford and Chrysler both also did well
during this period. However, as competition in the industry became increasingly global, foreign carmakers entered the U.S. market, at first mainly by importing
vehicles from overseas plants. Among the first were German carmakers Volkswagen (now also owner of the Porsche and Audi brands), Daimler, and BMW, as well as
Japanese carmakers Honda, Toyota, and Nissan. These foreign entrants intensified competition, threatened the Big Three’s market share, and led to political
pressure to impose import restrictions in the 1980s. Not to be stopped, the new players responded by building U.S. plants in order to avoid import restrictions. More
recently, Korean carmakers Hyundai and Kia have also joined in and begun making and selling cars in the United States.
Although globalization and deregulation paved the way for significant new entry into the U.S. auto market, the worldwide car manufacturing industry has been
exposed to few new entrants. In fact, no new major car manufacturers have emerged in the last couple of decades simply because few industrial products (save for
commercial airplanes and nuclear power plants) are as complex to build as cars powered by internal combustion engines. Car manufacturers also require large-scale
production in order to be cost-competitive. Taken together, these factors create significant entry barriers into the car manufacturing industry. Would you say, then,
that a Silicon Valley technology startup attempting to break into this industry might be running a fool’s errand?
Serial entrepreneur Elon Musk, who creates and runs new ventures to address not only economic but also social and environmental challenges, begs to differ.
During the Internet boom, Musk made his name (and fortune) by developing an early version of Google maps and by co-founding the online payment system PayPal.
The sale of both companies amounted to close to $2 billion, which allowed Musk to focus on his lifelong passions in science, engineering, and space. Musk is
founder of and currently runs three different companies: SpaceX (which made history in May 2012 as the first private company to deliver a cargo payload to the
International Space Station with its Dragon spacecraft), SolarCity (basically the Walmart of solar panel installations for business and residential customers), and
Tesla Motors, an all- electric American car company. It is Tesla where Mr. Musk is currently focusing most of his attention.
As we have discussed, the U.S. automotive industry is characterized by high entry barriers. However, rather than attempting to overcome these barriers through
large-scale entry using traditional internal combustion technology, Mr. Musk uses new technology to sidestep them altogether. In particular, Tesla Motors develops
all-electric powertrains and cars, and currently offers three models. Unlike complex gasoline engines, electric cars are powered by relatively simple motors and
gearboxes that have few parts. In fact, the Tesla Roadster, an expensive sports car, has already successfully demonstrated that electric vehicles can be more than
mere golf carts by outperforming a Porsche 911 on key metrics such as acceleration. In a move to appeal to a more mass market and to reach a larger production
scale to drive down unit costs, Tesla next developed the Model S, a four-door family sedan. The Model S received an outstanding market reception, and was
awarded the 2013 MotorTrend Car of the Year. Tesla is also working on a newly designed seven-seat electric vehiclethe Model Xin an attempt to combine the
best features of an SUV with the benefits of a minivan.1
ALTHOUGH TESLA MOTORS has been successful in entering the U.S. automotive market using innovative new technology, its continued success will depend on
other firm and industry factors. While industry forces have been favorable for a long time in the U.S. automotive industry, recent dynamics have lowered the profit
potential of competing in this industry and thus reduced its attractiveness. Now that Tesla Motors has demonstrated how new technology can be used to
circumvent entry barriers, other new ventures may soon follow. Moreover, the incumbent firms are also adopting the new technology by introducing hybrid or all-
electric cars, further increasing rivalry in the industry.
Another external industry force that Tesla Motors must address is the bargaining power of suppliers. Lithium-ion battery packs are key components for Tesla’s
electric engines. They are supplied by only a few technology firms such as Panasonic in Japan. Given that these sources are few, the bargaining power of suppliers in
the electric car segment is quite high, further limiting the industry’s profit potential. As a consequence of the strong bargaining power of suppliers, combined with
the weak demand for its $100K sports car, Fisker Automotive, another American automaker of plug-in hybrid sports cars based in Anaheim, California, filed for
bankruptcy.
In this segment, the bargaining power of buyers is also strong. Individual buyers have many choices, and electric cars tend to be priced at a steep premium due to
low production runs. Large-scale buyers such as rental car companies Avis and Hertz or the New York City taxi fleet all have significant purchasing power, further
driving down profit potential. In addition, when demand is slowing, excess capacity tends to develop in the automotive industry, and the incumbent car companies
begin to initiate a cut-throat price competition to move inventory. Although both GM and Chrysler went into Chapter 11 bankruptcy, neither exited the industry but
rather restructured, causing excess capacity to remain in the industry. Finally, complementary products and services such as battery charging and service stations,
which are not yet ubiquitous, are needed to help consumers overcome anxieties concerning electric vehicle ownership.
Case Study 1
Tesla Motors (in 2013): Will Sparks Fly in the Automobile Industry?
Introduction
Facts of the Case. This should include all those significant factors that impact the situation.
Key Issues. Based on your analysis of the facts of the case, determine what issues confront the firm and what decisions must be made.
Questions
Analysis: Focus on External and/or Internal Environments
1. Conduct a PESTEL analysis to identify the forces affecting car manufacturing of alternate energy vehicles.
2. Conduct a SWOT analysis to analyze internal and external conditions Tesla must consider going forward.
Formulation: Focus on Business, Corporate, and/or Global Strategy
3. How does Elon Musk constrain Tesla’s options?
4. How has Tesla departed from existing auto industry practices?
Implementation: Focus on Recommendations and How to Execute Them
5. What short-term objectives are required for Tesla to survive?
6. What are the primary elements of Tesla’s internal and external environment that need to be addressed for it to achieve a sustained competitive
advantage?
Conclusion
Alternatives/Options. What alternatives/options exist for each of these issues? Generate a set of alternatives for each action and compare the pros and cons of
each, including any problems expected in implementing each alternative.
Recommendations. State what strategic marketing changes the organization should make and justify your choices. Itemize specific actions needed to implement
your strategy, including any required to overcome anticipated obstacles.
